Stagflation for the UK?
Preliminary retail sales in Germany released this morning show a surprise fall of 0.3% in retail sales for December. The EU’s largest economy had been expected to post a 1.9% increase compared to the previous month. EU CPI estimates are also released this morning which will provide a clearer picture of inflation in the euro zone. With the ECB appearing to take a hawkish stance if we see a rise in annual inflation to 2.3% in line with consensus the euro zone could raise rates sooner rather than later, which could provide support for the Euro.
The US dollar may also find support from the continuing political uncertainty in Egypt with the US dollar typically the currency investors turn to when seeking a safe haven. A raft of US figures are also out today following on from the relatively well received US GDP Q4 figures showing annualised growth of 3.2%, up from 2.6% in the third quarter. The rise was brought about by increased consumer spending, strong exports and a decrease in imports. Although analysts were expecting a rise of 3.5% it did send a message to investors that the US economy was on the right track.
That is more that can be said of the UK which appears to displaying all the halls marks of stagflation, high inflation coupled with stagnant growth. The pound fell against the dollar last week to 1.5750 on the back of the poor GDP figures, but has since staged a recovery to 1.5850. George Osborne’s comments over the weekend that the austerity measures will continue come at a time when calls for a Plan B grow louder. With seemingly no intention to deviate from existing spending plans and interest rates already close to zero it is worth pondering whether the Bank of England will embark on an additional round of quantitative easing, “QE2”, which involves the BOE buying government bonds to stimulate lending and growth. If the bad data continues pressure will only grow for a rethink of strategy.